Elon needs more Tesla stock to motivate him

[ValueArb]

Matt Levine's thoughts on the game theory behind Elon's latest request for more Tesla shares. 

 

Quote

The most normal way to be a tech entrepreneur goes something like this:

1. You take your best idea and found a company to do it.
2. If you need more money to do the idea, you raise capital from outside investors, lowering your ownership of the company from 100% to 50% or 20% or 10% or whatever, depending on how much money you need and what valuation the investors are willing to give your idea.
3. If you have some additional ideas, well, you’ve already got this company, it’s already got capital, it’s probably making money, so you might as well have the company do the other ideas too.

 

So Mark Zuckerberg had an idea for putting Harvard’s facebook on the internet, and this turned out to be a gajillion-dollar idea, though it did require enough outside capital and cofounders and so forth that he now only owns about 14% of the company that did it.[5] But now that company generates oceans of cash, which Zuckerberg has used to get into thingslike artificial intelligence and “the metaverse.” To the point that the company he founded to put Harvard’s facebook on the internet, Facebook, is now called Meta Platforms Inc., because it’s not just a facebook anymore. Zuckerberg keeps having ideas, and Meta keeps reflecting these ideas.

..

Similarly, an entrepreneur with, like, 20 ideas should arguably start 20 different companies to do them: Why share any of the profits of any of the ideas with the outside investors in any of the others? Give up only as much ownership of each idea as you need to fund that idea.

...

Elon Musk does not have literally 20 companies, but he does have a lot. And his investors do seem unusually content to back him, as a person, as a visionary tech entrepreneur, while only getting a small portion of his attention. And now he’s using that for leverage? Bloomberg’s Edwin Chan and Linda Lew report:

• Elon Musk leaned on Tesla Inc.’s board to arrange another massive performance award for him after he sold a significant chunk of his stake in the company to acquire Twitter.
• In one of several posts on the topic, Musk wrote that unless he has roughly 25% voting control at Tesla, he’d prefer to build artificial intelligence and robotics products elsewhere. While he remains the carmaker’s biggest shareholder with an almost 13% stake, he cashed in almost $40 billion worth of shares in 2022 to help fund the Twitter deal. 
• Musk, 52, praised Tesla’s board in other posts and said directors were waiting for a Delaware Chancery Court ruling before preparing another compensation plan. Judge Kathaleen St. J. McCormick — who also presided over Musk’s ill-fated attempt to get out of the Twitter deal — will decide a case brought by a Tesla shareholder who alleges Tesla’s board failed to exercise independence from Musk as it drew up his $55 billion performance award in 2018. ...
• Musk’s claim that he’s “uncomfortable growing Tesla to be a leader in AI & robotics” follows repeated boasts over the years that the company was a leader in the fields. Tesla markets products it calls Autopilot and Full Self-Driving — both of which are driver-support features — and has been developing a humanoid robot called Optimus. ...
• In July of last year, Musk announced the formation of xAI, a startup that aims to rival Microsoft Corp.-backed OpenAI and Google’s Deepmind. A week later, an analyst asked him during a Tesla earnings call whether the new AI company would overlap with, compete with or enhance the value of the carmaker’s AI efforts. He said the latter.

I laid out the theoretical corporate finance considerations above and, sure, Tesla’s car factories are capital-intensive while some of Musk’s software projects are maybe less so. But that’s not really what’s going on here. What's going on here is:

1. Musk started Tesla,[6] raised outside money, and still owned about 20% of it.
2. He then sold a big chunk of that stake to raise cash, for himself, to buy another company (Twitter) in his personal account (not for Tesla).
3. Now he’s going back to Tesla to be like “well, I own a lot of companies, and I can’t really give Tesla my full attention while only owning 13% of it, so you’d better double my stake, for free, if you want me to keep doing good ideas at Tesla instead of at all my other companies.”

 

Honestly it’s a good threat! If you’re Tesla’s board, and you know that Elon Musk’s top priority now is building AI, wouldn’t you rather have him do it at Tesla than elsewhere? Presumably you want him paying attention to Tesla — that’s why you’ve paid him billions of dollars to be Tesla’s CEO! — so you’d be sad if he turned all of his attention elsewhere.

 

And yet there is something pretty obnoxious about it. He can keep doing this! What if you give him 25% of Tesla, he sells that stake for billions of dollars, he uses the billions of dollars to fund some new distracting hobby, and he comes back to you in a year saying “yeah, I don’t know, my heart isn’t really in Tesla anymore, maybe if you gave me another 25% it would motivate me.” The $55 billion pay package in 2018 — the one that the board is currently getting sued for — was supposed to motivate him to focus on Tesla, and it very clearly had the opposite effect! It gave him too much money, which he spent on distractions. And now he needs more money to turn back to Tesla from those distractions.

 

In general, with normal workers, the tension is that you want to pay them enough to motivate them, but not so much that they “call in rich” and stop working. With Elon Musk, who is on some days the richest man in the world, you might think this would not be a huge problem. You might think “well, whatever motivated him to work night and day to increase his wealth from tens of billions to hundreds of billions of dollars, it probably wasn't his paycheck, so we can rely on his intrinsic motivation to solve big problems and get glory for himself.”

 

But that is wrong: Musk has plenty of intrinsic motivation, sure, but no particular reason to solve big problems for Tesla, as opposed to the many other companies that he has started or could start. It turns out that the problem of motivation is much worse for him. He’s got too much going on, and too much money; his companies need to compete for his attention, and that competition is expensive.

 

 

[Parsad]

I really admired Elon in the past, but these days he's just being a dink!

 

This Buffett quote seems to fit here:

 

Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don't have the first, the other two will kill you.

 

He's starting to remind me more and more of a burger chain owner I knew who had everything and then showed his true colors.  Cheers!

[Blugolds]

Cracks me up, everyone gets mad/angry at greedy Union labor or blue collar workers asking for a raise that keeps up with inflation when it was running 10% and the 2.5% or less raises werent gonna cut it, but then when CEOs try to strongarm the board with threats to GIVE them billions, thats just CEOs...CEO'ing. Gimmie a break. Like you said, whats preventing him from doing this again down the road. Its like a kid who blew his allowance on a toy that broke, or wasnt as cool as he thought and now he is threatening not to do any more chores unless you double his allowance...as a parent I know what I tell him. 

 

The entire goal/point of having a board is to have checks/balance on decisions in the best interest of shareholders (obviously that isnt always the case) but if Elon can just go to the board and demand that they do/give him what he wants or else, then what is the point of even having a BOD? 

[Cevian]

This sets such a bad precedent for all companies whose founders believe they are integral to the company they founded, especially when, as is usually the case, a company needs to pivot into new areas which are very different from the original idea. There is already a huge agency problem within corporations and now, once precedent is established, I can foresee all these CEOs blackmailing their boards in good conscience.

[Spekulatius]

The strange thing is that $TSLA stock isn’t even down on this news. I guess the longs think it’s a good thing. So he is going to get what he is asking for, more or less.

[TwoCitiesCapital]

50 minutes ago, Spekulatius said:

The strange thing is that $TSLA stock isn’t even down on this news. I guess the longs think it’s a good thing. So he is going to get what he is asking for, more or less.

 

Is it strange? 

 

I mean the man lied about the health of Tesla publicly when battling David Einhorn, misrepresented the reasons for the Solar City acquisition which was clearly just to bail out his cousins, lied publicly about taking Tesla private @ $420, etc etc etc

 

Governance and integrity have largely been lacking at Tesla for years and years and investors didn't care because they continued to get fabulously wealthy. As long as 'line go up', nobody cares about his self dealing, misrepresentations of fact, or the lack arms length/independent negotiations between his various entities when dealing with one another. 

 

It only becomes a problem that they'll care about when the stock goes down in a sustained basis. 

Edited January 17 by TwoCitiesCapital

[scorpioncapital]

we need to confiscate 20% of all billionaire wealth off the top.

[ValueArb]

11 hours ago, scorpioncapital said:

we need to confiscate 20% of all billionaire wealth off the top.

 

Can't wait until Elizabeth Warren is running Tesla and SpaceX by fiat, that's when we'll see real progress in EVs and space!

[Xerxes]

Blackmail.
Pure and simple. 

[Luke]

17 hours ago, TwoCitiesCapital said:

 

Is it strange? 

 

I mean the man lied about the health of Tesla publicly when battling David Einhorn, misrepresented the reasons for the Solar City acquisition which was clearly just to bail out his cousins, lied publicly about taking Tesla private @ $420, etc etc etc

 

Governance and integrity have largely been lacking at Tesla for years and years and investors didn't care because they continued to get fabulously wealthy. As long as 'line go up', nobody cares about his self dealing, misrepresentations of fact, or the lack arms length/independent negotiations between his various entities when dealing with one another. 

 

It only becomes a problem that they'll care about when the stock goes down in a sustained basis. 

Well said. Bloomstran has shorts open on Tesla and Nvidia, i think he is already losing money on Nvidia...:D

[tnathan]

People can hate on Elon for being a weirdo and really full of himself, but idk how you could call the initial 2018 share package a mistake. The stock was trading in the $20s back then and has since 10Xed. So yeah, he's got a huge ego and a lot of the success can't just be chalked up to him, but give credit where it's due. This is not about cow-towing to CEOs vs. withholding from normal employees. The guy is special at what he does and the results speak for themselves. He might be "distracted" but he still 10xed the shares so its a bad argument. I'm sure the next time he asks for shares he will again have to have proved that he has produced results, or he won't get special treatment

[Parsad]

24 minutes ago, tnathan said:

People can hate on Elon for being a weirdo and really full of himself, but idk how you could call the initial 2018 share package a mistake. The stock was trading in the $20s back then and has since 10Xed. So yeah, he's got a huge ego and a lot of the success can't just be chalked up to him, but give credit where it's due. This is not about cow-towing to CEOs vs. withholding from normal employees. The guy is special at what he does and the results speak for themselves. He might be "distracted" but he still 10xed the shares so its a bad argument. I'm sure the next time he asks for shares he will again have to have proved that he has produced results, or he won't get special treatment

 

I don't think anyone is suggesting he isn't worth the pay package.  Just that it's an asshole move to demand it or he won't move forward with AI development.  

 

Buffett was worth the money too, but you would never see him doing that.  Yeah, not everyone is Buffett...doesn't mean we can't hold people up to that standard.  

 

Cheers!

[Haryana]

I wonder if this news is being misinterpreted.

 

Elon Musk has been vocal for a while about his concerns on AI going out of control.

 

I saw the news as simply to mean that he wants enough control in order to be able to control the AI.

 

He expects the AI at his company to be one of the most advanced and he needs control on the company to control the AI because he thinks he can do it.

 

[ValueArb]

17 hours ago, tnathan said:

People can hate on Elon for being a weirdo and really full of himself, but idk how you could call the initial 2018 share package a mistake. The stock was trading in the $20s back then and has since 10Xed. So yeah, he's got a huge ego and a lot of the success can't just be chalked up to him, but give credit where it's due. This is not about cow-towing to CEOs vs. withholding from normal employees. The guy is special at what he does and the results speak for themselves. He might be "distracted" but he still 10xed the shares so its a bad argument. I'm sure the next time he asks for shares he will again have to have proved that he has produced results, or he won't get special treatment

 

He already owned billions in stock and was the de facto founder of Tesla. If the board had given him a fraction of the 2018 option package, would he have not kept working at his brain-child that he has his ego wrapped up in? I doubt it very much. In reality most of Tesla's success since then was predestined because of market position and technology and the team at tesla, not because of extra efforts by a part-time employee. 

 

16 hours ago, Haryana said:

I wonder if this news is being misinterpreted.

 

Elon Musk has been vocal for a while about his concerns on AI going out of control.

 

I saw the news as simply to mean that he wants enough control in order to be able to control the AI.

 

He expects the AI at his company to be one of the most advanced and he needs control on the company to control the AI because he thinks he can do it.

 

 

He already controls the company because he controls the board. And Tesla is just one of dozens of companies working on pattern matching models, which are colloquially called "AI" and which will never be alive or need "control". Giving him more stock doesn't affect what OpenAI does with their models, or anyone else.

[changegonnacome]

Yep asshole move.

 

If your a TSLA shareholder, given the valuation, your kind of all in on the Elon option bet already. Its worked out very well for you. The other people in stock I'm guessng (the non-cultists) are basically momentum traders & trend followers.

 

Elon with this request is asking his stockholder/followers to basically double down on him again here......my guess is they will.....and the board will roll over....stock price & elon are inextricably linked....the board has a tough problem.....protecting shareholder value (the price anyway) requires holding to the Elon....such that the Elon premuim remains embedded in the high stock price.......a board that didn't acquise could perversely find itself in court for not following their fiducrary duties...as they would know that Elon walking would tank TSLA by I dunno 30-50%?

 

The collateral damage and innocent bystanders being hurt here - and you can thank S&P for this - is the index holder that finds this in their 401k....and is gonna get sucked into the Elon shakedown if this happens......which I find distasteful.....but this is in the nature of the index fund structure you hold a diversified bucket of stuff and are gonna find yourself & your hard earned retirement savings tangled up in nonsense like this. For every TSLA/Elon value smash & grab.....you get to participate in NVIDIA going to the moon. In the end it works out satisfactorily.

Edited January 18 by changegonnacome

[Haryana]

His message never asked for more stock but only for more voting power.

He may have thought this to be possible by introducing dual class share.

However, there appears to be some regulation that restrict that post IPO.

 

 

https://www.theglobeandmail.com/business/international-business/article-ceo-elon-musk-says-he-wants-at-least-25-voting-control-at-tesla-before/

[In a separate post on X, he said he would be fine with a dual-class share structure to achieve his goal of getting 25-per-cent voting control, but was told it was impossible after Tesla’s initial public offering.

“It’s weird that a crazy multi-class share structure like Meta has, which gives the next 20+ generations of Zuckerbergs control, is fine pre-IPO, but even a reasonable dual-class is not allowed post-IPO,” he said, referring to the Facebook parent’s founder, Mark Zuckerberg.

Companies with dual-class structures have two or more types of shares with different voting rights – usually one with greater voting rights for founders or early investors and another for other shareholders with less voting power.]

 

https://www.fairfax.ca/press-releases/fairfax-completes-brit-acquisition-2015-06-12/

Even Prem Watsa had to take extraordinary actions to maintain his voting control. From what I remember, he rather had limits/reductions placed on his compensation in return.

 

[changegonnacome]

37 minutes ago, Haryana said:

His message never asked for more stock but only for more voting power.

He may have thought this to be possible by introducing dual class share.

 

To be clear - he asked for more voting power and in the same twitter thread & almost simultaneously acknowledged that there was no way for TSLA to introduce a dual share structure post-IPO.

 

Therefore -by simple deduction -  he was quite clearly, in effect, demanding more stock or he was gonna take his AI ball and go home.

 

Edited January 18 by changegonnacome

[Gmthebeau]

Total A-hole move.  He wasted a shitload of money on twitter so now he wants the Tesla shareholders to eat his mistakes.  Honestly, at this point I think Tesla would be better off firing him and getting an adult CEO.  He didn't even found the company like most people think.  It already existed.  The Tesla Roadster already existed.   Between twitter, apparently doing drugs according to the WSJ, spaceX, and his other assorted companies how much can he actually be working anyway?

Edited January 18 by Gmthebeau

[ValueArb]

2 hours ago, Gmthebeau said:

Total A-hole move.  He wasted a shitload of money on twitter so now he wants the Tesla shareholders to eat his mistakes.  Honestly, at this point I think Tesla would be better off firing him and getting an adult CEO.  He didn't even found the company like most people think.  It already existed.  The Tesla Roadster already existed.   Between twitter, apparently doing drugs according to the WSJ, spaceX, and his other assorted companies how much can he actually be working anyway?

 

I agree with much of what you wrote, but Elon is clearly the most important founder of Tesla (and there is a legal settlement with the "real" founders giving him the right to the title "founder"). He was the only person willing to give the original two founders seed funding, hired its most important employee (JB Straubel, the CTO), and Tesla was only able to raise further funding because Elon lead every round. Most importantly, he was always heavily involved. He helped design the Roadster, and when the original CEO came up with a production plan for the Roadster that would have cost $250k/unit Elon fired him and took over, and saved the company by lowering those costs enough to price it at $80k. And then he led development of the Model S, which is really why Tesla became so valuable. 

 

That said, I agree he doesn't deserve any more stock, it's questionable whether he's still critical to their success, and he's heavily distracted with other projects and social media jihads.

[james22]

On 1/17/2024 at 5:47 PM, Haryana said:

I wonder if this news is being misinterpreted.

 

Elon Musk has been vocal for a while about his concerns on AI going out of control.

 

I saw the news as simply to mean that he wants enough control in order to be able to control the AI.

 

He expects the AI at his company to be one of the most advanced and he needs control on the company to control the AI because he thinks he can do it.

 

This is how I take it.

[Gmthebeau]

15 hours ago, ValueArb said:

 

I agree with much of what you wrote, but Elon is clearly the most important founder of Tesla (and there is a legal settlement with the "real" founders giving him the right to the title "founder"). He was the only person willing to give the original two founders seed funding, hired its most important employee (JB Straubel, the CTO), and Tesla was only able to raise further funding because Elon lead every round. Most importantly, he was always heavily involved. He helped design the Roadster, and when the original CEO came up with a production plan for the Roadster that would have cost $250k/unit Elon fired him and took over, and saved the company by lowering those costs enough to price it at $80k. And then he led development of the Model S, which is really why Tesla became so valuable. 

 

That said, I agree he doesn't deserve any more stock, it's questionable whether he's still critical to their success, and he's heavily distracted with other projects and social media jihads.

 

I do think he was really valuable in the early days as you pointed out, but I am not sure he adds much/any value these days.  He seems pre-occupied with twitter and his political beliefs.   I think at this point he probably has turned off a lot of people who would never buy a Tesla with him there.   They certainly have a big lead, but I suspect with all his associated nonsense he will squander the entire thing slowly then all at once.   

[Spekulatius]

Elon is clearly valuable for Tesla and I think he deserves some stock, so the board cannot just ignore his request. There is a question how much is justified or not. I think the board could structure a deal about him having substantial voting control on the AI part of the business without causing excessive dilution for Tesla shareholders. Another way would be to create another class voting share stock with more voting power. Both could work if it’s really voting control he is after.

[Gregmal]

I do find it amusing how bent out of shape people get about him; he’s literally just doing what any finance guy would do if they had the ability. You can’t honestly tell me these money and career obsessed egomaniacs wouldnt or don’t do the same type of stuff in the context of how it applies to their opportunity set. 
 

Ultimately it’s up to the Tesla BoD to determine if this makes sense for shareholders. But finance dudes whining about a scheme to enrich oneself is really…..rich.

Edited January 19 by Gregmal

[Gmthebeau]

I think it is probably one of the best shorts on the board.   Once it starts trading like an auto maker, which is all it really is, it probably has downside to about $50.

[changegonnacome]

38 minutes ago, Gmthebeau said:

I think it is probably one of the best shorts on the board.   Once it starts trading like an auto maker

 

Be careful shorting cults.......be doubly careful shorting cults where the founder/CEO has a history of saying anything to pump the stock (funding secured/FSD etc.)......not saying dont do it (I've done it myself and made $$$) but size it appropriately.

 

Better yet - the time to go after TSLA  is if/when Musk is gone...and it gets a CEO who cares about his reputation and SEC disclosures/violations. Musk is above all that and remains IMO the greatest salesman of our age.